One Place Where Fintech <i>Isn't</i> Trending: Bank Earnings Calls

A common trope these days is for banks to describe themselves as tech companies that specialize in the movement of money.

At tech conferences, they talk up their mobile strategy and tout their innovation labs in Silicon Valley or in Chennai, India. At economic conferences like Davos, they talk about their fintech partnerships and the future of banking.

But in the conference calls they host quarterly with financial analysts — who influence how investors value the banks — tech talk is reduced to a few sound bites, taking a backseat to the more tangible metrics: loan growth, efficiency ratios and net interest margins.

What drives the divide? Dollars and cents, it seems.

"What will wake up Wall Street to technology at banks?" said Fred Cannon, director of research at Keefe, Bruyette & Woods. "When it starts showing up in the numbers. So far, it hasn't."

For the most part, it seems like bankers are mostly just playing to their audience. They may sprinkle a few tech nuggets in their prepared remarks — JPMorgan Chase has made reporting the numbers of people using its mobile-banking platform a tradition, for instance — but analysts don't ask much about it during the question-and-answer portion where the juiciest parts of the quarter often come to light.

For instance, during the conference calls to discuss the fourth-quarter earnings at six of the largest banks, the words "expenses," "revenue" and "energy" — a hot topic this earnings season — were ubiquitous. Words like "technology" or "innovation" were mentioned far more sparingly.

To the analysts, technology is part alchemy, part table stakes; it could prove to be a differentiator, but it can also just be a fad. So, for now, they would rather dwell on more tangible matters.

"Analysts are skeptical about pie-in-the-sky futurism — we've heard about new technology changing the face of banking for years," Cannon said. "There is always something new — the supermarket branches in the '90s or [Washington Mutual's] branch of the future, for instance."

Given their focus on predicting future earnings, technology and its effects are hard to value other than as expense items, said Mark Fitzgibbon, director of research at Sandler O'Neill.

"It is really hard to discern how much profit came from having a new technology," Fitzgibbon said. "You can't perfectly triangulate it."

There could come a day when a clear line can be drawn between stronger loan growth and the adoption of a small-business lending platform, or a drop in deposits following a disastrous tech rollout. Technology could become a bigger part of how bankers discuss their quarterly results as it takes a bigger role in the way people interact with their bank. 

For their part, bankers seem to want to share their tech stories with analysts, and by extension investors. At least the ones that have made it a priority.

Richard Davis, the chief executive of U.S. Bancorp, said in his company's fourth-quarter conference call earlier this month that the company would begin "bringing more visibility to our innovation budget and the kind of money we're spending to be at the front end of some of those new ideas."

Tech is also a broad and somewhat amorphous term, so it is perhaps hard to boil it down to a point on a brief call. Many banks instead include tech updates as part of investor days, Fitzgibbon said.

Indeed, technology is expected to be a major theme at JPMorgan's investor day next month, with several executives detailing how technology is shaping different business lines.

"When you discuss technology, it can incorporate so much — from making things more efficient and giving customers better services to partnering with startups and building tech hubs," said Joe Evangelisti, head of communications for the company. "So we have to think about it in a coordinated way."

Analysts' interest in technology could change dramatically in the next 12 to 18 months, said Brett King, chief executive of the neobank Moven and host of the "Breaking Banks" radio show.

Executives at a bank in Europe recently told him the branch network has stopped generating revenue. As he sees it, this is a harbinger of things to come, specifically for the regional and community banks that do not have the resources of the largest banks to invest in digital channels.

"At this stage, many of them only have revenue at the branch level. They don't sell any products online and this is going to be a complete shift," King said. "Smart analysts are going to be looking at these banks, with their big branch networks, and say, 'We are going to discount you, we are going to be bearish on your stock because you have no plans for a digital-revenue strategy.'"

Legacy core-banking systems could also force analysts to care. Archaic systems that were not designed to process the volume of data that mobile banking is producing may lead to major problems or major expenses should banks decide to fix them, observers from the fintech world said.

"If banks want to change their tech stack, they've got to spend a lot of money to modernize legacy systems that are old and clunky," said David Klein, chief executive of CommonBond, a marketplace lender. "That's hard to do in a world where many shareholders would rather see quarterly cost reduction than necessary long-term investment."

But, in the case of an outage because of a core system, "those are brand-ending situations," King said.